Cisneros-Acevedo, Camila
(2020)
Two margins of informality.
PhD thesis, University of Nottingham.
Abstract
The ILO (2018) report shows that more than 61 per cent of the world's employed population work informally, most of them in emerging and developing countries. The majority lack social protection, rights at work, and decent working conditions. The ILO emphasizes that a transition to a formal economy is a condition to realize decent working conditions for all. Despite its importance, informality still lacks a universal definition. Throughout this thesis, I consider two margins of informality. The extensive margin, where firms do not register their business; and the intensive margin, where legally established firms do not pay mandatory contributions such as retirement and health insurance on behalf of their workers.
In the first chapter, I confirm that both informal workers and women receive lower wages than their formal and male counterparts. Most importantly, I find that the informality wage penalty is stronger for extensive-informal workers. Moreover, the gender wage gap is substantially bigger when women are employed in the extensive margin of informality. I also conduct a descriptive study on workers' individual characteristics that motivate them to accept a job in either of the margins of informality. I find that demographic characteristics such as age, civil status, education and geographic location are significantly different for each margin of informality.
In the second chapter, I study the effect of exposure to trade on informality and find that the effect is different on each margin. It goes in opposite directions. On the one hand, stricter import competition triggers a decline in the extensive margin of informal employment as unregistered firms shrink or exit the market because they are not productive enough to survive. On the other hand, intensive-informal employment rises as registered firms reduce marginal costs by hiring informal workers. Furthermore, results show that the intensive margin drives the overall effect. Thus, exposure to trade increases informality.
In the third chapter, I develop a theoretical framework that models firm's decision. Specifically, firms choose to be informal (or not) in either of the margins. They do so taking into account that there is a risk of detection and that they might also be penalized by the tax collection agency. Adding these features to a Melitz(2003) type model provides a better understanding of the firms' choice on informality found in the second chapter. The least productive firms choose to operate as unregistered firms while the most productive registered firms allocate a substantial proportion of their labour to formal workers. Furthermore, I find that when the economy faces an increase in import competition, registered firms reallocate labour towards informal employment as a mean to reduce costs. At the same time, when the least productive unregistered firms face tougher competition coming from abroad, they exit the market. Thus, the effect of trade on informal labour is ambiguous as informal labour grows in registered firms and shrinks in unregistered ones. In this chapter, I study under what conditions the effect of the intensive margin of informality dominates as the empirical results suggest.
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